Month / June 2016

The British vote to leave the European Union (EU) is the first step toward formal disintegration that the West has experienced. The closest parallel is France’s decision to step outside the integrated military command structure of the North Atlantic Treaty Organization (NATO) in 1966. But France remained a member of NATO; that decision was more like Britain’s opt-out from the single currency or Schengen, even if the shift of NATO’s headquarters from Paris to Brussels made it seem more dramatic. By contrast, the British have now decided that they do not want to take part in the EU and that they want to renegotiate their relationships with the rest of the world on a case-by-case basis. The West has not gone through anything like this since the end of the Second World War.

There is a growing chorus of disenchantment with Europe and populist parties are preaching anti-European slogans across the member states. Today’s British referendum on European Union (EU) membership is only the most extreme manifestation of that disaffection. Whatever the outcome, the turmoil surrounding popular attitudes toward Europe is not going to end. The reason is a lack of vision.

This is a talk I gave on 21 June at the European Political Strategy Center, which is the in-house think tank of the European Commission. The audience was very generous in listening to my presentation. The point I tried to make is that the capital markets union is an important project, but we should be careful to ensure that policymakers supplement the efforts to make capital markets more efficient with efforts to make them more resilient. This is an argument that I have made before and yet it is probably worth repeating. Given the dynamics behind Europe’s economic and financial crisis, there is simply too much at stake.

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Thank you for giving me the opportunity to share some thoughts about the relevance of U.S. experience for Europe’s capital markets union. My argument is that U.S. experience is relevant both in terms of its successes and in terms of its mistakes. The most important lesson I draw from the United States is about the importance of managing or channeling the flight to quality when financial markets come under duress. In jargon, my specific concern is when a sudden increase in liquidity preference translates into a spontaneous return of home bias. In plainer language, what interests me is how we handle situations where investors decide to place priority on protecting the value of their assets.

The referendum campaign on whether Great Britain should remain a member state of the European Union (EU) or leave is in full swing. Campaigners for Britain to ‘remain’, including Prime Minister David Cameron, insist that the British government has successfully renegotiated its relationship with the EU. Those who want Britain to ‘leave’ insist that the opt-outs Cameron won are insignificant and untrustworthy; whatever the British government may say, the bureaucrats in Brussels are plotting a ‘super state’ that will usurp British sovereignty.

The British referendum is based on (at least) two bad ideas. The first is that the popular legitimacy of a referendum can restore the sovereignty of the British parliament. The Leave campaign believes they can take power from Brussels and give it back to Westminster. That is a fantasy. The British parliament will be more constrained and less effective if the UK leaves. The second bad idea is that referendums are more democratic than acts of parliament (which is the kind of decision that brought Great Britain this far in its relationship with Europe). By giving the people the chance to speak their mind on a yes-or-no (in-or-out, remain-or-leave) question, we can discover what they really want. That is not how people work. Real people prefer trial and error. Real people also like to delegate responsibility for making complicated decisions. This matters because the two bad ideas combine to make the worst of all possible worlds. Britons who vote to Leave will discover that they have made a terrible mistake only to learn that there is no easy way to fix it.

The European Central Bank (ECB) made no changes to its policy stance when the Governing Council met in Vienna on 2 June. Price inflation in the euro area remains well below the ECB’s definition of price stability and the prospects for inflation to move upward remain unchanged. Nevertheless, ECB President Mario Draghi argued in response to questions during his press conference, ‘we have to see the full impact of the measures that we’ve decided in March.’ Some of those, like the targeted long-term refinancing operations that offer to subsidize bank lending and the inclusion of corporate bonds in the ECB’s large-scale asset purchases will only start over the coming weeks. It takes time for such measures to work their way through to the consumption and investment that drives the real economy. And for those who complain that the ECB seems slow in meeting its policy target, Draghi made it clear that: ‘the medium term for a return to inflation to our objective of an inflation rate of close to but below 2 percent is pretty long.’ In other words, the ‘medium term’ from the ECB’s perspective is essentially as long as it takes.